How Brexit complicates the post-pandemic recovery

As when blood returns to frozen limbs, there is bound to be some stiffness, pain and difficulty; so there is when the economy returns to normal after a shock. Most of the figures suggest that Britain is bouncing back quickly from the coronavirus recession, but there are increasing signs that labour shortages are starting to be a problem.

This is where leaving the EU could complicate the recovery, because – unlike other countries that shut down during the virus – the UK made fundamental changes to its labour market at the same time.

We ceased to allow the free movement of workers between the UK and the EU at the beginning of this year, which means – given that an estimated 1.3 million non-UK workers left the country during the pandemic – the economy cannot simply go back to how it was before.

Today’s figures from Indeed, a jobseeking website, suggest that the number of EU citizens searching for work in the UK has fallen by a third since the end of free movement (which more or less coincided with the arrival of the virus), although Irish citizens continue to look for jobs in the UK, as do workers from non-EU countries.

More than any other country, therefore, we are likely to have our recovery come up against a pinch point in the labour market. In some ways, this is a good thing. It is likely to bid up wages, including those of low-skilled service jobs that were so attractive to EU workers. Most economists argued that free movement of workers did not depress wages, because the UK was so successful at creating jobs, but if labour shortages are now pushing wages up, it is obvious that free movement did not increase wages either.

In the longer run, higher wages are likely to increase the incentive for British workers to gain the skills that EU workers found were in demand here: building, plumbing and farm work, for example. But in the short term, labour shortages are likely to hold the economy back compared with how things would have been if we were still in the EU.

Higher wages, especially for the low paid, ought to be welcome. More negotiating power for employees against employers would also reduce some of the abuses of zero-hours contracts and insecure work. But it could also cause inflation, because the easiest way for employers to recover their costs is to put up prices. It has been such a long time since inflation has been a problem that there are many younger people who know what it means only in theory, or who know that they should be worried about it because economists have been warning about the dangers ever since governments resorted to printing money in the wake of the 2008 financial crash.

But if inflation does take off, that means interest rates will have to go up – the Bank of England is required to try to suppress inflation that way. Which will be a much bigger problem now, with the extra weight of coronavirus debt pressing down on the government’s finances.

Thus Brexit could mean that the UK economy overheats before its competitors, and that we go into the spiral of high inflation, high interest rates, higher debt costs and falling currency before they do.

It could be that Brexiteers are prepared to pay an economic price for leaving the EU – although in the EU referendum campaign, I think only Nigel Farage came close to saying that it was worth being poorer to be free of the tentacles of the European superstate. There is certainly a case for shifting the balance of power in the labour market in favour of low-paid workers and against employers, and for encouraging more British workers to acquire the skills we need rather than importing them from central Europe.

That would fit with Boris Johnson’s “levelling up” slogan, and Rishi Sunak’s trip to Leeds today to open the new infrastructure bank.

But it is likely to come as a shock to most Leave voters if it turns out that Brexit has left the UK economically weaker than its rivals, and less able to sustain the growth on which paying back the pandemic debt eventually depends.